Actively managed exchange traded funds are back in the spotlight as many providers have launched them or plan to do so soon. Investors are told they will benefit from the lower costs, intraday trading and a chance to beat related indices, but some debate this.
“While on average, active management underperforms passive management by their fees, this says nothing about the return distribution of active management. Let’s take a look at the performance of broadly diversified index funds in the U.S. large-blend category. Virtually by definition, their returns tend to cluster near the category average on an annual basis,” Michael Rawson wrote for Morningstar.
Actively managed ETFs can actually diverge from the targeted benchmark, making the chance of outperforming difficult. The performance of active management as a category must include those funds that did not survive the term of study because of analysts ignore them, the analysis suffers a bias, reports Rawson. [Active ETF Sector is Gaining Traction]
Therefore, several studies can be performed with different focuses. First, we can analyze performance of only the surviving funds, knowing there is a bias. Second, we can asset weight the returns, which tends to diminish the effects of funds that close since these funds are typically small. Or we can substitute index fund performance for the periods after an actively managed fund closes.